$7 million ATO preference claim fails after court rejects insolvency case

The Supreme Court of Western Australia has dismissed a $7 million unfair preference claim against the Commissioner of Taxation after finding that Construction Industries Australia Ltd (CIA) was not proven insolvent when the challenged payments were made. Justice Cobby rejected claims by LCM Recoveries Pty Ltd, assignee of the liquidators’ causes of action, seeking recovery of $7,005,329.27 paid to the ATO through 86 transactions between December 2012 and June 2013. The Court was not satisfied that CIA was insolvent either on 12 October 2012, the date relied on to trigger the statutory presumption of insolvency, or during the subsequent preference period.

CIA provided construction, contracting and engineering services in Western Australia and formed part of the ASX-listed Allmine Group. After reporting net profits after tax of approximately $10.4 million in FY2011 and $6.7 million in FY2012, the company encountered falling project margins and growing cash flow pressure in late 2012, while also adjusting to weekly PAYG withholding obligations.

CIA ultimately entered liquidation on 21 June 2013, when related company Arccon (WA) Pty Ltd resolved to wind it up voluntarily and David Hurt and Kimberley Strickland of WA Insolvency Solutions were appointed joint and several liquidators. The unfair preference claim was commenced in 2017, and LCM took an assignment of the claim in 2022.

Justice Cobby found that CIA was experiencing liquidity problems but that the evidence did not establish an endemic shortage of working capital. The company's books and records were incomplete, and the Court found internal "headroom reports" relied on by LCM's expert were too unreliable to establish insolvency. Other evidence indicated CIA was generally paying trade creditors within commercially acceptable periods and lacked several usual insolvency indicators, including dishonoured cheques, cash-on-delivery demands and widespread creditor pressure.

The Court also rejected LCM's claim over $478,084.31 of payments made to the ATO by Arccon. Although Arccon effectively made the payments using funds transferred by CIA, LCM failed to prove that the transactions diminished CIA's assets available to creditors, as required for an unfair preference.

Justice Cobby further found that, if CIA had been insolvent, the Commissioner would have established its statutory good faith defence for payments received before 13 May 2013. By that date, however, the ATO knew CIA's 2012 income tax return was almost four months overdue and had received an implausible explanation for the delay, giving it reasonable grounds to suspect insolvency.

The Court also considered the economics of the litigation after the liquidators assigned their claims to LCM in 2022. Evidence suggested that even a full recovery may have produced no return for ordinary unsecured creditors after funding, legal and liquidation costs. Justice Cobby said that argument had considerable force, but declined to rely on it because the issue had not been properly pleaded, and the Court had approved the assignment.

The proceeding was dismissed, with the Court indicating that costs should follow the event.

Read the decision here.

K&L Gates acted for the Commissioner, with Sam Rosewarne SC of the Victorian Bar and James Healy of Francis Burt Chambers appearing as counsel.

HWL Ebsworth Lawyers acted for LCM Recoveries, with Julie Taylor SC and Wayne Zappia SC of Shoreline Chambers appearing as counsel.